Blue move heats up

By Todd Cohen

Aiming to overcome objections from state regulators and its own parent group to its plan to become a for-profit company, Blue Cross and Blue Shield of North Carolina is set to give regulators a new plan – but also to scrap it and stay a nonprofit entity if regulators do not signal soon they are likely to approve the conversion.

The new plan, expected to be submitted early this week to the Department of Insurance and the Department of Justice, would aim to strengthen the role in the insurer’s business decisions of a charitable foundation the conversion will create.

The changes are designed to meet objections raised by regulators that the Health Foundation for North Carolina, which initially would own all of Blue Cross’ stock, would not get enough say in Blue Cross’ business decisions or be able to protect the value of its Blue Cross shares.

The changes also will reflect a conversion plan for Empire Blue Cross and Blue Shield in New York expected to be considered Sept. 19 by the Blue Cross and Blue Shield Association, the franchise group that owns the Blue Cross and Blue Shield trademarks and names the insurer says it needs.

Blue Cross officials in North Carolina expect the association will approve both conversions – overcoming objections it has raised that the North Carolina insurer’s previous plan would give the new foundation too big a corporate role.

With Insurance Commissioner Jim Long set to hold three hearings in October on the proposed conversion, Blue Cross says it will withdraw its plan before the first hearing on Oct. 9 if regulators do not indicate they are comfortable with the changes Blue Cross is proposing in the plan it submitted to them on July 26.

“We have said from the outset that unless we were assured that there were agreements that would be acceptable to the Blue Cross and Blue Shield Association, thereby protecting our license and marks, and that we had reason to believe would be acceptable to the Department of Insurance and the Department of Justice, we would not go through the public hearing process,” says Brad Wilson, Blue Cross’ senior vice president and general counsel. “As of today, we have no such assurance.”

Wilson characterizes as “a very positive step toward that assurance” the Sept. 12 announcement by Attorney General Roy Cooper designating the 11 directors of the board of the new Health Foundation for North Carolina.

“You now have the entity that will be in fact be the party to these agreements in existence,” Wilson says.

But he says Blue Cross has not heard anything from the Insurance Department “that would give us reason to believe that it will respond favorably” to a plan similar to the one the Blue Cross and Blue Shield Association is expected to approve for Empire Blue Cross.

Insurance Department spokesman Chrissy Pearson says the department has been “very critical” of Blue Cross’ plan.

“We continue to be critical,” she says. “That is our burden under law.”

She adds that the department’s “willingness to continue negotiations surely must indicate that we fell there’s a point in continuing negotiations.”

J.B. Kelly, general counsel for the Justice Department, says it is “unrealistic to expect approval of [conversion] documents before the public hearings. Everyone knew going into this process, as the statutes lay out, that approval – if it occurs at all – will occur after public hearings.”

If Blue Cross decides it does not want to convert, he says, “they can always attempt to withdraw their plan.”

Blue Cross, which in recent weeks has announced it will make several changes in its plan designed to ease opposition from regulators and from its parent association, says it spent $9 million through August on the conversion, including the cost of lawyers, investment bankers and other groups serving as consultants to it and to the Insurance Department and Justice Department.

“It’s time to finish this,” Wilson says. “We’re burning $1 million a month.”

Kelly says that if Blue Cross opts not to proceed with its conversion, “we would assess that decision to determine whether or not there was a waste of corporate assets.”

Wilson says an investment banker advising the Justice Department and a law firm advising the Insurance Department also are advising, respectively, Empire Blue Cross and the foundation it would create, suggesting that both regulators “would know and understand the terms and conditions of the Empire deal and the role the association is playing” in that conversion.

“And one would assume the advisers in New York have approved the terms and conditions of the Empire deal and have declared they provide adequate and reasonable protections for the foundation in New York” that will be created through Empire’s conversion, Wilson says.

“And one could draw from that,” he says, “that whatever is fair and reasonable in New York, if you have something aligned with that down here, we’re okay.”

Kelly says “advisers give advice” but “don’t make decisions on behalf of clients. Just because the parties signed off in New York doesn’t tell me what the advisers think about the deal.”

Of the total spent on the conversion plan, Blue Cross says, $4.5 million paid for Insurance Department costs and $1.7 million paid for Justice Department costs.

Insurance Department consultants include:

* LeBoeuf, Lamb, Greene & McRae, New York law firm also advising foundation being created through Empire Blue Cross conversion.

* Helms, Mulliss & Wicker, Raleigh law firm.

* Smith Moore, Raleigh law firm.

* Accounting firm Ernst & Young.

* Compensation consultant Clarke/Bardes Consulting, Marlborough, Mass.

* Sanford Institute for Public Policy, Duke University, providing advice on health access.

Justice Department consultants include:

* Brooks, Pierce, McLendon, Humphrey and Leonard, Greensboro law firm.

* Credit Suisse First Boston, New York investment banker also advising Empire Blue Cross.

* Anderson & Associates, Charlotte executive search firm, assisted in selection of board for new Health Foundation for North Carolina.

Consultants to Blue Cross include:

* Robinson, Bradshaw & Hinson, Charlotte law firm.

* Hunton & Williams, Raleigh law firm

* Goldman Sachs, New York investment banking firm.

* PricewaterhouseCoopers, accounting firm.

* Hewitt Associates, consultant on personnel issues.

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